What are bonus shares? And How it benefits Investors?
What are bonus shares? And How it benefits Investors?
What are bonus shares?
Just as the name suggests, they are extra shares given along with the shares you already own of any company. This bonus is very simple, it means a free share. Any company, from time to time, declares a bonus share instead of a dividend.
How bonus shares are offered?
It is a free additional share offered to shareholders as a token of appreciation. Bonus shares are distributed in proportion to the number of shares held by an investor. When a firm offers 1:1 bonus shares, it means that for every 1 share you own, you will receive 1 free share.
What happens to the value of shares when bonus is awarded?
As a result, if an investor owns 100 shares at the time of the bonus, his or her holdings will increase to 200 shares. As a result, the share price will drop by 50% in a 1:1 bonus issue. So the value of shares you hold won’t change.
For example,
if you’ve bought one share of any company for Rs. 1,000 and the company declares a 9:1 bonus, it means that you will now get 9 free shares for every one share you own.
Now, does that mean you will have 10 shares worth Rs. 1,000 each? Of course not. The stock price will come down in a similar proportion. A Rs. 1,000 stock will come down to the Rs. 100 ranges because now you will have 10 shares on the same investment of Rs. 1,000.
Why does a company offer bonus shares?
Simply said, it’s to make the share more affordable for smaller investor..
Here’s an example, 1 share of MRF Tyres is worth Rs. 90,000! Not everyone can afford to designate such a big amount for just one share of a company in their portfolio. Hence, if a 9:1 bonus is declared, we can all possibly get an MRF share, because it will be somewhere around the Rs. 9,000 range.
Another reason is to improve the liquidity in the stock. Now that there is more supply in terms of quantity, and the stock is affordable for small investors like us, this causes more retail participation, which might also result in the increase of the stock price.
Stock bonuses are also ways for companies to better distribute their shareholding.
What are the benefits of bonus shares to investors?
Investors, on the other hand, tend to benefit in the long run when stock prices rise.
When are bonus shares given and to whom?
The big question here is, does every share buyer get bonus shares after such an announcement? Not exactly.
The company announces a record date, and you are only eligible to receive the bonus if you have those shares on or before the record date.
Real Life Example:
You’ve probably heard of Infosys, one of India’s biggest IT firms. Up until today, they’ve announced bonus shares 8 times. If you had bought one Infosys shares when they hit the markets back in 1993, you would have approximately 512 shares for every 1 share you bought.
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